Canadian currency declines to six-week low as retail sales fall

Canadian consumer prices increased less than the central bank’s 2% inflation target in July for a 15th straight month, a Bloomberg survey forecast before tomorrow’s report. Prices rose 1.5% from a year earlier, it estimated. Canada’s economy grew 1.6% in the second quarter while slipping 0.5% in June, economists forecast before data due Aug. 30.

The Bank of Canada has kept its benchmark interest-rate target at 1% since September 2010 to support the economy.

The loonie weakened even as futures on crude oil, Canada’s largest export, gained 0.5% to $104.32 per barrel in New York, after touching an almost two-week low yesterday.

Options traders were at the most bearish level on the Canadian dollar in six weeks. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, was 1.6%, matching yesterday’s level, the highest on a closing basis since July 8. The 2013 average is 1.25.

Higher Volatility

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart increased to 7.8%, the highest since July 16. Implied volatility is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8%.

The loonie fell 0.8% in the past week against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. Only the New Zealand dollar and the Norwegian krone dropped more, losing 2.1% and 2.5%. The U.S. dollar gained 1.3%.